SKINK LTD AND ANOTHER v. COMTOWELL LTD AND ANOTHER

IN THE COURT OF APPEAL

1994, No. 74
(Civil)

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J U D G M E N T

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Penlington, J.A.:

1. This is an appeal from a judgment of Kaplan J. on an application by the liquidator of the plaintiff for an order setting aside the conveyance of two properties which were owned by the plaintiff but were transferred to the 1st defendant, its parent company.

2. The application was under O.14 on the basis there was no defence to the claim, the properties having been conveyed at much less than their real value and payment being made by book debt.

3. The facts of the matter are set out fully in the judgment of Kaplan J. An order was made in January 1993 for the compulsory winding-up of the plaintiff and the Official Receiver was appointed provisional liquidator. The 2nd defendant, Mr. Maydwell, was the principal shareholder and director of both the plaintiff and the 1st defendant. The properties consisted of a flat in Mid-levels on Hong Kong Island and an office in Kowloon. The flat was purchased in 1985 for $1.2 million and was sold for $1.1 million in 1992. The property in Kowloon was purchased in 1982 for $1 million and was sold in 1992 for $800,000.

4. In the light of the very substantial increase in property values in Hong Kong, which was here supported by valuations obtained by the defendants and by the Official Receiver, it was clear that these sales were at very substantial discount. On one set of figures it was about one third of the market value and the other about one fifth.

5. It is the case here, as it was before Kaplan J., that those under-values were such that there could be no reasonable explanation for them and that they must have been done in order to defeat the creditors of the plaintiff and under s.60 of the Conveyancing and Property Ordinance that such conveyances may be set aside if the Court is satisfied that they were done with intent to defeat such creditors.

6. There was a point taken, and indeed it formed the great bulk of Kaplan J.'s judgment, that O.14 was not available because there was an allegation of fraud and O.14 in Hong Kong, although no longer in England, states that an action which includes a claim by the plaintiff based on an allegation of fraud is not within the ambit of the order.

7. Here we decided that we would not go into the question of what, in the context of O.14, is "an allegation of fraud" on which there are conflicting authorities between Hong Kong and England but would, for the purposes of the argument, assume that there was jurisdiction to allow the application and to consider whether, on the affidavit evidence before the judge such an order should have been made.

8. Kaplan J., having dealt with the question of fraud, then briefly said that even if he had found that he did have jurisdiction he would nevertheless have declined to make an order for summary judgment. While Mr. Fitzpatrick who appeared before him, as here, for the Official Receiver, had made out a strong case he thought that the defendants should be given an opportunity of arguing the merits based on a very long and careful affidavit filed by the 2nd defendant.

9. The basis of the liquidator's claim is the forceful dicta of Sir George Jessell M.R., In re Butterworth Ex Parte Russell [1882] 19 Ch. D. 588 where he said:

"[A] man is not entitled to go into a hazardous business, and immediately before doing so settle all his property voluntarily, the object being this: "If I succeed in business, I make a fortune for myself. If I fail, I leave my creditors unpaid. They will bear the loss."

10. Here the property was not conveyed voluntarily but was certainly conveyed for an undisputed under-value.

11. A case to which we have been referred to by both counsel and which is not without difficulty, is Lloyds Bank v. Marcan [1973] 1 W.L.R. 1387. There Mr. Marcan, who was being pursued by Lloyds Bank because of moneys owing to them, owned a property consisting of a house and market garden and, having taken advice, with the intention of retaining possession of the property because he wished to continue to reside there with his family, he gave a twenty-year lease of the property to his wife. Lloyds Bank would not then be able to secure vacant possession of the property because it was subject to the lease and it would only receive the rent over that period.

12. At first instance, Pennycuick V.C. held that Mr. Marcan did not know that his conduct would prejudice the amount which the Bank would obtain towards payment of his debt to it but he did appreciate that in seeking vacant possession of the property in the course of realising its security, the Bank would attach value to vacant possession. The Court of Appeal clearly found some difficulty in reconciling those two findings. Nevertheless, Cairns L.J. and Russell L.J. held that, despite the finding that Mr. Marcan did not know his conduct would prejudice the Bank, the conveyance did come within the equivalent section and was done with intent to defeat creditors.

13. Cairns L.J. clearly had doubts about the matter and said so. He held that deceit is not a necessary element but dishonest intention is, at any rate, when the conveyance is for consideration. Here the conveyance is for consideration although, as I have said, it is clearly for inadequate consideration.

14. Cairns L.J. finished his judgment with a paragraph which is relied on by Mr. Fitzpatrick. He said:

"The elements which in the end persuade me that he acted with intent to defraud his creditors are that he granted the lease at the time when he knew that the bank was seeking possession; that he must have known that it would have been more convenient for the bank to have vacant possession than merely to have possession of the rents and profits;"

15. Here in the affidavit filed by the 2nd defendant there is an explanation for the conveyance in the properties. It was that to convey them to the 1st defendant, a non-trading company, would enable more favourable treatment to be received in the way of advances from the Forex Bank, which had indicated that it would make some finance available in replacement of existing bank, BCCI. He said that it was a pure re-structuring of the affairs of the plaintiff, a re-structuring which was favourable to the plaintiff and therefore favourable to its creditors. He said that the 1st plaintiff was in fact trading very well. In the month before the conveyance it had its best figures ever. It was dealing in cordless telephones which were being exported to a company which is now the principal creditor, Australian Telephone Distributors Ltd., and no doubt funds were required for the purchase or manufacturer of those telephones.

16. The conveyances in themselves, if they had been for full value, would be difficult to challenge but it is the under-valuation of them which forms the basis of the claim here made by the liquidator. Mr. Maydwell says that the under-valuation shown in the conveyances was done first of all for possible tax reasons so as to avoid a claim for tax on an increase in value. It seems somewhat difficult to understand that in the context of Hong Kong tax laws but there could be some argument for that. Secondly it represented historic value and it would have been inappropriate for the conveyance to be at the full value because of the Bank having agreed to make facilities available to the plaintiff basically on the security of those properties.

17. Having read Mr. Maydwell's explanation for the conveyances it clearly is one which very much open to challenge but for my part I could not say that it is an explanation that just simply from reading it and from the contemporary documents cannot possibly succeed. I think when Cairns L.J. said that in his view a dishonest intention must be shown when the conveyance is for consideration is highly relevant and I do not consider it would be impossible for the 2nd defendant to show that he did not have a dishonest intention at the time the conveyance was made.

18. As has been said on so many occasions O.14 is only to be used in the plainest possible cases. When the provision that an allegation of fraud precluded an application under O.14 was abolished in England, the editor of the Annual Practice said that it was anticipated that judgment under the Order would only be granted, where it was necessary to rely on fraud as a basis for the action, if the evidence of such fraud was overwhelmingly clear. I do not think it is so overwhelmingly clear here and I would dismiss this appeal. In doing so I would also echo the views expressed below by Kaplan J. that it is a pity the claim was not pressed forward for trial, which in all probability would now be concluded, rather than to pursue the O.14 application with all its difficulties.

Godfrey, J.A.:

19. The judge below dismissed the plaintiff's application because in his view it fell outside the provisions of O.14 r.I which provides, among other things, that the rule is not to apply to "an action which includes a claim by the plaintiff based on an allegation of fraud": see O.14, r.1(2)(b).

20. He went on, however, to say that if he had concluded that he did have jurisdiction to deal with the plaintiff's application, he would nevertheless have declined to accede to it.

21. In this court, we indicated that we would assume, without deciding, that the judge was wrong in holding that he had no jurisdiction to entertain the plaintiff's application, and we heard argument only on the question must, in my judgment, be decided in favour of the defendants; for these reasons.

22. These proceedings are brought pursuant to s.60 of the Conveyancing and Property Ordinance, Cap.219. This is the Hong Kong equivalent of the provision first found in the Statute of Elizabeth (13 Eliz. cap.5) which makes void as against creditors of deeds made "to the end, purpose and intent to delay, hinder or defraud creditors and others ...". S.60, like its present English equivalent (s.172 of the Law of Property Act 1925) shortens this to "intent to defraud creditors".

23. This contraction does not, in my judgment, make any difference. If you find that the plaintiff has proved an intent on the part of the defendant to delay, hinder or defraud his creditors the plaintiff will succeed; but, in each case, you must look at the whole of the circumstances surrounding the execution of the deed and then ask yourself the question whether the deed was in fact (it is a question of fact) executed with the necessary intent; see Ex parte Mercer, In re Wise (1886) 17 QBD 290, and In re Holland, Gregg v. Holland, [1902] 2 Ch. 360 (especially per Vaughan Williams L.J. at p. 372). The court will rarely be able, on an application for summary judgment, to come to the conclusion that the necessary intent has been sufficiently established if the defendant has denied any such intent and has offered an innocent and credible explanation for his conduct (by "credible" I do not mean an explanation that is bound to be believed; only one that is capable of being believed).

24. In the present case, as Penlington J.A., has pointed out, Mr. Maydwell has offered in evidence an explanation of the transaction, including an explanation of the fact that the properties were transferred to the 2nd defendant at an undervalue; i.e. that the properties were disposed of at historic cost, not at current market value, because that appeared to have some advantage for tax purposes. Whether that evidence is to be believed, or not, must in my judgment be a matter for the judge to decide at trial. It cannot be decided upon an application for summary judgment. We cannot conclude on the evidence before us that Mr. Maydwell's story is incredible and that there plainly no defence to the action. I therefore agree that the appeal must be dismissed, but before parting with the case, I wish to express my approval of valuable passage in the judge's judgment in which he commented on the use, the present case, of O.14. The passage is worth quoting in full. The judge said this:

"I cannot leave this case without commenting, that, in my judgment, it is a pity that an application under O.14 was taken out because it would have been better, as it usually is, to pursue an early hearing date. The writ was issued almost 12 months ago, on 28th April 1993. For some reason it took 5 months for the statement of claim to be issued. The defence was dated the 1st December and there were consequential amendments. The O.14 summons was not taken out until 31st January 1994. Had the statement of claim been taken out earlier, bearing in mind that this is not a case where there can be a great deal of discovery as the documents speak for themselves, by mid 1994 the matter could have, perhaps, been ready for trial. The issue of fact is relatively simple and I do not think that this case could or should last more than a couple of days. At the O.14 hearing before me, the hearing lasted less than a day and we canvassed most of the authorities that would be required at trial. O.14 applications seem to be a reflex action in Hong Kong, and a great deal of a civil judge's time is taken up deciding whether or not cases should go on for a hearing. In many of them, the parties would have been better off to go on with the matter and get a final judgment at trial." (emphasis added.)

25. I entirely agree with these observations, and would add that a plaintiff who starts O.14 proceedings believing that the defendant has no defence to the action should be advised, as soon as a credible defence is shown, to give up trying to obtain summary judgment; to do otherwise is simply to waste time and money. In particular, it should be realised that this Court will only very rarely be prepared to reverse a decision by a Judge that the defendant ought to have unconditional leave to defend the action.

Power, V.-P.:

26. I too would dismiss the appeal and have nothing to add.